Table of contents

Introduction

Welcome to Osler, Hoskin & Harcourt LLP's third annual comprehensive report on venture capital and growth equity financing transactions in Canada's emerging and high growth companies ecosystem.

The state of Canadian venture capital and growth equity financing in 2023 can be best described by two words — resilience and renewal. In 2023, the Canadian economy settled into the reality of higher, sticky interest rates as the Bank of Canada continued to battle inflation, with the result being a continued reduction of business and consumer activity amidst the high cost of borrowing and looming fears of a recession in 2024. These economic trends also affected the venture capital and growth equity financing space across Canada, creating downward pressure on overall financing activity in 2023, with a return to pre-pandemic levels of investment and an uptick in more investor-friendly terms, particularly for those companies raising capital in the context of a down round.

However, there is still good reason for optimism in the Canadian venture capital and growth equity financing space. We see signs of great resilience as new, transformative technologies in cleantech and artificial intelligence emerge and create investment opportunities in Canada for Canadian and non-Canadian investors alike. At the same time, provinces like Ontario, British Columbia and Québec continue to serve as engines of venture capital and growth equity financing activity in Canada, while provinces in the Prairies and Atlantic Canada continue to make the case that they, too, are critical destinations for venture and growth equity investment in Canada. We also see clear signs of renewal as early-stage financings dominated deal flow in 2023, signaling investor confidence in the future of Canada's emerging and high growth companies ecosystem as these investors made new long-term bets on promising companies — all despite the economic challenges that marked 2023.

About the 2023 Deal Points Report

This year's release of the Deal Points Report: Venture Capital Financings synthesizes data from 486 venture capital and growth equity preferred share financings completed by Osler from 2020 to 2023, representing more than US$7.7 billion in total transaction value. It is important to note that these 486 financings represent, as a random sample, only a portion of Osler's significant overall financing deal volume; from 2020 to 2023, Osler represented clients in the emerging and high growth companies space in 1,106 financing transactions, including preferred share equity financings and the issuance of convertible securities (such as Simple Agreements for Future Equity (SAFEs) and convertible promissory notes), with an aggregate deal value of approximately US$14.16 billion. This significant level of transaction volume, combined with Osler's position as the preeminent Canadian legal advisor to clients in the emerging and high growth companies space, are key factors in our unique ability to produce a publication like the Deal Points Report. In the LSEG (formerly Refinitiv's) Global Private Equity Legal Review: Full Year 2023, for example, Osler was ranked eighth globally amongst legal advisors to venture-backed companies based on number of rounds and tenth globally amongst legal advisors to venture-backed companies based on round value. Our firm was the highest ranking Canadian legal advisor included in the global top ten for these rankings. In addition, Osler is the only Canadian firm to rank as "Band 1" for Startup & Emerging Companies in the 2024 Chambers Canada rankings.

The Deal Points Report is unique within the Canadian market as it does not rely solely on publicly available information or third-party submitted data. Instead, it draws on Osler's confidential anonymized data sources, with a focus on providing readers with deeper access to comprehensive financing-related information that goes beyond what can be gathered from publicly available data sources. Osler has undertaken publishing the Deal Points Report as we believe information from non-public sources — including comprehensive financing-related data extracted from term sheets, share purchase agreements, shareholders agreements and secondary sale transaction documents — should be available to all stakeholders within the emerging and high growth companies ecosystem. And because all data presented in the Deal Points Report is from financings completed by Osler across the country, the authors are able to interpret and contextualize raw data inputs with the benefit of first-hand exposure to these financings, thereby enhancing the production of meaningful insights and reliable conclusions.

The Deal Points Report also provides the opportunity to profile some of Osler's clients and to share their unique and inspiring stories, including how these clients were able to succeed in raising a financing round and continue to thrive despite 2023's challenging market conditions. We are truly grateful for the support and trust of these clients, and all of the firm's clients. At Osler, we are fortunate to represent entrepreneurs and emerging and growth stage companies that cover a broad spectrum of knowledge-based industries, supporting them through the phases of their lifecycle and providing legal advice on a wide range of issues and requirements along the way (read our emerging and high growth clients' success stories.) We are proud to play a role in each of these journeys, which in turn are parts of a much bigger story: the growth and exceptional success of a resilient emerging and high growth companies ecosystem across Canada, an ecosystem that continues to create jobs, promote innovation and foster economic growth across the country while attracting significant amounts of domestic and international investment.

Finally, there are many data points that we feel are relevant to the market and important to track, but that did not make it into this year's publication. We will continue to refresh the content and data points in future releases of the Deal Points Report. In the meantime, please do not hesitate to reach out to any of the lawyers in our Emerging and High Growth Companies Group in our offices across Canada to discuss the findings in this year's publication. We also welcome requests to present additional data points that may be of interest in future versions of the Deal Points Report. To submit a request, please contact us at emergingcompanies@osler.com.

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Osler's emerging and high growth clients share their success stories

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Highlights from the Deal Points Report

  • The number of down rounds in 2023 was 2.25 times the average of the previous three years (2020–2022) covered by the Deal Points Report. Additionally, in 2023, 16% of all financing rounds, where a company was raising a subsequent round of financing, qualified as down rounds — compared to only 7% of such financing rounds in 2022. Notwithstanding the increased incidence of Canadian down rounds in 2023, the Canadian average was still below the U.S. average reported by Carta, where more than 19% of U.S. funding rounds in 2023 were down rounds. We believe this data confirms the expectations that we set out in prior releases of the Deal Points Report: companies that raised at significant valuations during the pandemic have exhausted their cash runways and bridge financing strategies (which were designed to defer setting new valuations in 2022) were forced to go back to the market in 2023, where valuations were markedly lower than they were during the pandemic.
  • Of those companies that completed a down round during the four-year period covered by the Deal Points Report, the highest incidence of down rounds occurred in later stage financings (i.e., Series C, Series D and beyond). This aligns with our expectations: companies completing later stage financings are more susceptible to market pressures that affect their financial and customer metrics, which in turn influences investor demand and valuations. This data is also consistent with U.S. deal studies in 2023, including Fenwick's Silicon Valley Venture Capital Survey — Third Quarter 2023 [PDF], Wilson Sonsini's The Entrepreneurs Report Private Company Financing Trends [PDF] and CooleyGo's Interactive Data for 2023, which showed that U.S. emerging companies experienced a sharp increase in the number of down rounds, with Carta calling 2023 the "year of the down round".
  • The highest concentration of financings in Canada occurred at the early stages (i.e. Series Seed and Series A; representing 78% of all 2023 financings rounds), which is consistent with findings from other Canadian reports, such as those prepared by the Canadian Venture Capital and Private Equity Association (CVCA), including the Canadian Venture Capital Market Overview — 2023 and U.S. reports, including those from CBInsights.
  • 50% of financings covered in the Deal Points Report in 2023 saw the conversion of convertible instruments on closing: the highest incidence of the conversion of convertible instruments was at the Series Seed and Series A stages. Similarly, between 2022 and 2023, there was an approximate 1.73 times increase in the percentage of Series A financings whose closings included the conversion of convertible instruments. This pattern is reflective of emerging companies' strategies during 2022–2023 to raise bridge rounds in an effort to extend their cash runway, and avoid potentially lower valuations in 2023. As a result, many of these bridge rounds are now converting, as these same companies start returning to the market to raise priced rounds.
  • Companies in the information technology industry (including artificial intelligence — which accounted for nearly 50% of all investments in these companies — blockchain, adtech, edtech and cybersecurity) make up over 30% of all companies raising a financing round covered by the Deal Points Report in 2023, with health/life sciences-focused companies having the second highest concentration of financings, representing over 19.8% of the financings covered. Notably, investments in cleantech-focused companies nearly doubled from 2022 to 2023 and we expect to see this trend continue. One particular figure is worth noting: artificial intelligence companies (included in the information technology industry figures above), represented 15% of the financings for 2023).
  • In 2023, Ontario and British Columbia had the highest concentration of companies raising a financing round that were included in the Deal Points Report — representing 48.1% and 16.5% respectively, of all Canadian companies included.
  • The percentage of companies covered in the Deal Points Report that were founded by women fell from 16.4% in 2022 to 14.7% in 2023. Similar to 2022, our data from 2023 shows that Series Seed, Series A and Series B financings contained the largest concentration of companies founded by women. However, and as supported by the Pitchbook Venture Monitor, investment in women-founded companies in 2023 most notably declined at the Series Seed financing stage. We intend to monitor this data point and remain committed to supporting women in the emerging and high growth companies ecosystem as they continue to build incredible companies at all stages of growth.
  • Over 97% of financings in 2023 covered by the Deal Points Report used documentation generally based on the CVCA model financing agreements, demonstrating that financings based on forms consistent with the CVCA model financing agreements continue to be market standard in Canada.
  • While our data did reveal an uptick in investor-friendly terms between 2022 and 2023, most notably in terms of a greater incidence of senior ranking preferred shares, cumulative dividends and participation rights, our data also shows that there continues to be an overall adherence to historical norms for key financing terms, including pari passu 1x liquidation preferences, no participation rights, broad-based weighted average anti-dilution, no redemption rights and non-cumulative dividends.
  • For 38% of financings covered by the Deal Points Report in 2023, proceeds were invested over more than one closing, up from 22% in 2022, as companies often took longer to establish their investor syndicates, and investors required additional time to obtain internal approvals amidst challenging market conditions. Notwithstanding this trend, the number of days to get from an executed term sheet to a first closing decreased across all categories of financing rounds (as compared the average closing times during 2020 through 2022). This is consistent with the above, as companies were more willing to allow for multiple closings, enabling them to close more quickly with initial investors.
  • Data relating to preferred director, common director and independent director board representation shows a trend towards a greater proportion of preferred director representation in later stages of financings (with preferred directors representing 45% and 56% of the total composition of the board for Series C and Series D companies, on average, for 2023). The data reflects a larger proportion of non-preferred directors in Series Seed and Series A financings, typically representing greater consolidation of founder and common shareholder control in these companies.

Resilience and renewal characterize the emerging and high growth companies ecosystem in 2023

Michael Grantmyre, partner in Osler's Emerging and High Growth Companies Group, outlines the key findings and trends from theDeal Points Report.

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Methodology and background

  • The Deal Points Report consists of a review of 486 preferred share financings, from Series Seed financings through to Series D financings and beyond, completed by Osler between 2020 and 2023. These preferred share financings include a small representation (approximately 9.5%) of financings involving a U.S. company where one of the firm's Canadian offices was engaged in the matter. Common share financings and financings resulting in the issuance of convertible securities, such as Simple Agreements for Future Equity (SAFEs) or convertible promissory notes, were excluded.
  • The total value of all initial investment across all of the financings covered by the Deal Points Report was US$7.1 billion. The total value of initial investment, plus follow-on investment, across all these financings was US$7.7 billion.
  • Osler was company counsel in approximately 73.3% of the financing transactions included in the Deal Points Report and investor counsel in approximately 26.7% of these financings.
  • Osler collected and anonymized data from both public (where documents such as company articles are publicly filed) and non-public financing documents related to these transactions, including term sheets, articles, share purchase agreements, shareholders agreements and secondary sale transaction documents.
  • Financings covered in the Deal Points Report span a four-year period.
  • The Deal Points Report is divided into four sections: General overview, Valuation and investment intelligence, Financing structure intelligence and Financing terms intelligence.
  • All dollar amounts for financing transactions that were not originally denominated in USD were converted into USD based on the applicable foreign exchange rate published by the Bank of Canada on the closing date for the applicable financing. To the extent that the closing date of such a financing transaction occurred on a holiday, the applicable dollar amount was converted into USD based on the applicable foreign exchange rate published by the Bank of Canada on the next business day.

About Osler's Emerging High Growth Companies Group

The Emerging and High Growth Companies Group at Osler is composed of individuals who are passionate about entrepreneurship and fostering the development of early and growth stage ventures. Osler is the only Canadian law firm ranked Band 1 in Chambers Canada, and our team members in our Toronto, Vancouver, Montréal, Ottawa and Calgary offices, are eager to share their experience and insight with emerging companies to help maximize their development and ensure long-term success.

We represent entrepreneurs and emerging and growth stage companies nationwide from a broad spectrum of knowledge-based industries, supporting them from incubation through their growth trajectory, as well as the venture capital funds, growth equity funds and private equity funds that finance them. We provide legal advice on the wide range of issues and legal requirements that emerging and high growth ventures face, from corporate and tax structuring, to fundraising and shareholder agreements, to intellectual property strategies and employment and compensation-related matters — all of which require a deep understanding of the market and expert counsel.

Osler acts for more than 2,000 early, growth and late-stage ventures and venture investors across Canada, in the United States and around the world. In 2023, despite the effects of market changes and pressures, Osler advised on 269 venture financing transactions, including preferred share financings, convertible note financings and SAFE financings, with more than US$2.19 billion raised by emerging and high growth companies, many of which are showcased in the data forming the basis for this Deal Points Report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.